WASHINGTON, Jan 18: Germany’s economy is set to expand by a healthier 1.5 per cent this year but needs a fundamental overhaul to cope with daunting long-term challenges, the International Monetary Fund said on Wednesday.

In an annual review of the world’s third-biggest economy, the IMF raised its previous gross domestic product growth forecast for 2006 from 1.2 per cent. It projected GDP growth in 2005 of 1.0 per cent.

“The recovery in our view is still hesitant and unbalanced,” Ajai Chopra, deputy director of the IMF’s European department and mission chief for Germany, told reporters.

German growth relies too much on exports rather than consumer spending, he said, highlighting “low and falling trend growth, high and long-lasting unemployment and persistent fiscal pressures” in Europe’s largest economy.

The IMF’s growth forecast for Germany is at the bottom end of a range of 1.5 per cent to 1.8 per cent predicted for 2006 by Economy Minister Michael Glos.

For 2007, the IMF foresaw growth slowing to 0.75-1.25 per cent, due in part to a hike of the value-added tax (VAT) planned for next January to help Germany get its finances in order.

German companies are cautiously investing, the Fund said. “However, structural labour market weakness, giving rise to slow employment and wage growth, is inducing cautious consumer spending.”

Recent indicators have shown investor and business confidence higher than they have been for years in Germany. But growth has been driven almost exclusively by exports, while domestic demand is lagging.—AFP